Editorial: Time to pump the Official Cash Rate brakes

The Reserve Bank delivers its April Monetary Policy Review on Wednesday amid calls to apply some rigorous braking. Photo / Mike Scott, File

EDITORIAL

If the surge in inflation pressures could be compared to a heavily-laden truck on a steep decline, one might say the momentum is close to outstripping the ability to safely apply the brakes.

As prices at the fuel pumps and supermarket checkouts continue to increase, there are growing shouts for the Reserve Bank to undertake monetary policy tightening at a more aggressive pace to decelerate these inflation pressures.

Today, the Reserve Bank is widely expected to answer those calls with an increase in the Official Cash Rate (OCR). No one doubts the bank will deliver a rise in its April Monetary Policy Review. The only question is, by how much?

Raising the wholesale price of borrowing or lending money should ease the momentum on runaway prices, but braking too heavily could take New Zealand off what Reserve Bank Governor Adrian Orr refers to as the "path of least regrets" and into a deep recession and sharp rise in unemployment.

As Herald Business editor-at-large Liam Dann wrote this week ASB and BNZ economists are leaning towards a 25 basis point hike, even though they say it is a close call. However, ANZ chief economist Sharon Zollner picks 50 basis points, as does Sydney-based Capital Economics, noting that economic activity is starting to rebound post-Omicron peak and "evidence continues to mount that inflation is getting out of hand".

More evidence of the quandary facing the Reserve Bank is found in a report by the New Zealand Institute of Economic Research (NZIER). The institute runs a "shadow board" as a device to give their insights into monetary policy changes extra depth.

This week, the NZEIR shadow board stated it was sharply divided over how much the Reserve Bank should increase the Official Cash Rate (OCR) at the April meeting, with views split over whether the OCR should increase by 25 or 50 basis points.

Surging inflation pressures have led to more agreeing with Zollner when she says "The RBNZ has a big job to do to rein in runaway inflation, and the sooner they rip into it, the lower the economic cost is likely to be."

In seeming to agree with this, some shadow board members raised concerns about the potential for a wage-price spiral, the phenomenon of price increases as a result of higher wages which continue to feed off each other and further drive inflation.

However, other shadow board members called for caution in the pace of interest rate increases over the coming year. The NZEIR report points out recent weakening in business and consumer confidence due to uncertainty stemming from the spread of the more transmissible Omicron variant of Covid-19 and the war in Ukraine were further reasons for a more measured pace of monetary tightening.

BNZ research head Stephen Toplis points out in the NZEIR report: "There is no doubt the cash rate needs to rise and keep rising until it is through neutral. The only point of contention is how fast and how far."

In other words, Orr needs to change down gears and steadily brake while keeping an eye on where the road may level out.

• The Monetary Policy Review will be published as a statement at 2pm on Wednesday. The Business Herald will have instant market reaction analysis of the rate decision through the afternoon.